Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest public sector finance figures from the ONS:
“Money flowing out of public sector continues to comfortably exceed the cash coming in, to the tune of £16.8 billion in December. Despite the high figure, the dials are generally heading in the right direction from the peak of the pandemic, albeit not as quickly as the Chancellor might like.
“Central government tax revenues rose by 10% year on year, boosted by low levels of unemployment, even in the aftermath of the furlough scheme. Meanwhile expenditure came in lower than last December, but only just, because interest payments on government debt trebled compared to last December, to £8.1 billion, a record for the month.
“That’s because higher inflation has pushed up the cost of government bonds that are pegged to RPI, costing the government £5.5 billion in December 2021. With price rises still coming down the track, inflation is going to continue to bump up the coupons paid by the government to holders of RPI linked bonds, so this won’t be a flash in the pan.
“To add considerable fuel to the fire, interest rates are rising, which means the government will have to pay more interest on the £875 billion of gilts held with the Bank of England. And if that were not enough, gilt yields have shot up, to over 1% on the 10 year bond, which means the government will also be paying more for freshly issued debt than before the pandemic.
“With the debt to GDP ratio sitting at 96%, the highest level since the 1960s, the Chancellor is still wedged in a tight spot after the pandemic has ravaged the nations finances. The good news is so far this financial year, public sector borrowing is coming in below OBR forecasts. The bad news is the government is facing calls to help out with the cost of living crisis, including pressure to postpone the new Health and Social Care Levy, which is expected to raise £12.7 billion in the coming financial year. That would leave a sizeable hole for the Chancellor to fill in his March Budget.
“Two months is of course a very long time in politics, and given the political turmoil in Westminster, we can’t even be sure who will be delivering the Budget when March rolls around. We can be more certain that the pressure on government finances will be considerable.”
